The fox and the market

[Forexfux]

Hi Stefan,

Once again, enjoyed reading this article you have posted. Quick question. Given that a retail trader's stop loss on a buy position is the same as setting a sell order in the same where the stop would have been; do you have any thoughts on comments on this approach?

For example, if I buy at 3100 with a stop loss at 3000, I could instead use a 'sell stop' at 3000 instead of a stop loss order, right.

This way, as long as I'm scaling up in the direction of the market move, I will move with the fox, scaling up with the fox where ever he goes.

Any thoughts on this?

Another one by Scott Percival

Placing Better Stops

Introduction

!

Hi Sk29,
a SL of a buy order is nothing else than a sell stop order and a Sl of a sell is nothing else than a buy stop order.

When a sell/buy stop order gets triggered they get "transformed" into market orders. They will then consume offer/bids (limit orders).

Imagine price ticks at 50 and there are 200 buy stop orders at 51 plus 100 offers at 51 and 150 offers at 52. Next price ticks up to 51 and the 200 buy stops get triggered. Now there are 200 market buy orders which consume the 100 limit sells (offers) at 51. We have more buying orders than selling liquidity is offered. The next step is that price is surching for more liquidity and when buying>selling price will go up. The next stack of liquidity is at 52 (150 offers). The second 100 marked buy orders gets covered and 50 offers are left at 52...

[Forexfux]

latent orders

Latent orders are the reason why it makes sense to monitor the market sentiment and fundamentals.

Who could explain latent orders better than the master himself Darkstar:

"Latent order interest is simply an accounting of participants who can/will trade if price were to move to a specific price level, but due to the costs associated with managing orders, remain on the sidelines until it does so.

To give you an example of how this manifests itself in the real world; imagine that you are a fundamental trader with an analysis which shows security A to be with 1.000. If price is currently hovering around 1.000, you likely have very little interest in participating in the market. However, if price suddenly moves down to .500 without a change in the underlying fundamentals, you’re going to have a great deal of interest in buying. In this example your desire to trade at .500 would be latent interest.

Latent order interest is predominantly comprised of fundamental traders so it tends to remain constant as long as the information related to fundamental value remains unchanged. When new information becomes available, this curve will shift up or down to reflect the aggregate opinion of what that new information means for fundamental value.

As a general rule however, the opinions formed by fundamental traders are slow to materialize. It may take a number of hours or even days for this new information to become properly digested. In the interim, the latent demand will curve will become somewhat wider and flatter due to the variability of interpretations regarding the data."

Latent order will become limit and market orders.

[Forexfux]

Good evening,
do you guys notice what the yen pairs made today? Maybe you remember what I wrote about the yen sentiment. I would say thx to the japanese monetary policy but today was bank holiday in germany and I took off a day .

Anyway...forex offers endless chances.

cheers

[lhDT]

Hi Stefan,

This is a great thread, thanks !

What timeframe do you generaly trade ?
You please have a look at the attachement ?

At point 1, Breakout traders should go long at a new high with buy-stops.
At point 2, same for short, they have some sell-stops around the red line.
Breakout long, should also have their stoploss below the low (point 2), and breakout short traders have their stoploss at a new high (point 1).
So, do you think it is better to enter long at point 3 and go short at point 4, once all the stops has triggered ?

My question is, how do you know the price will bounce or not ? What extra confirmation you use ? Candle patterns ? W/M ?

Cheers,
Lio

[Forexfux]

Hi Stefan,

This is a great thread, thanks !

What timeframe do you generaly trade ?
You please have a look at the attachement ?

At point 1, Breakout traders should go long at a new high with buy-stops.
At point 2, same for short, they have some sell-stops around the red line.
Breakout long, should also have their stoploss below the low (point 2), and breakout short traders have their stoploss at a new high (point 1).
So, do you think it is better to enter long at point 3 and go short at point 4, once all the stops has triggered ?

My question is, how do you know the price will bounce or not ? What extra confirmation you use ? Candle patterns ? W/M ?

Cheers,
Lio

Hello Lio,
welcome to the thread.

1) I trade all timeframes from daily down to the 5m. Often I pinpoint my entries on the 5m chart.

2) You missed that the break out traders were nailed with the spike of the huge bull candle. Break out traders are usually the uninformed traders and they are the goodies of a stop hunt. Normal bo traders fall in the category of "weak hands". A great deal of them got probably stopped out when price came back below the last high. The bo traders with balls have placed their SL orders below 1.2900. The price spiked because theere was a good stack of sl orders above the last high before the liquidity gap down. When market makers are shooting for SLs that doesn't mean that a move in the other direction has to follow.
Btw bo traders are using stop orders and market orders (which were latent orders before).

I would never base a trade decision on one tf and I use tools like PA to increase my probabilities. I attached a your ss with a little analysis.

[Forexfux]

Order flow informations

Hi all,

aside from finding order flow by yourself on the chart there are some ressources which offer OF informations for free:

http://www.forexlive.com/

https://twitter.com/OrderFlowForex (Darkstars Twitter Acc)

plus as an Oanda client (not my main acc) I get the Reuters IFR feed.

Pls don't ask me where Darkstar does his informations get from. I really don't know.

All in all I'm not the biggest fan of extern OF informations because a) sometimes they are distracting and overwhelming (orders are everywhere) and b) I don't like to be dependent on other people.

[SWG123]

Stefan,

Really enjoying your thread - great stuff, thank you!

Steve

[dudest]

Stefan, love your thread man...!, thanks

[Forexfux]

Great that some traders benefit from the thread.

I forget to mention regarding OF informations that the book "Trading & Exchanges" by Larry Harris is the bible of market structure.

Furthermore when you have checked the OF links you may have noticed that there are often headlines which refer to options.

Barrieres of options are attracting price and again Dali explained in his baybpips.com thread why:

"Barrier Options

Barrier options are exotic derivates and an option on the price of the underlying asset. The option writer (typically banks) sell options to the option buyers. FX Options are traded over-the-counter and not on exchanges. If the option expires worthless, the option writer has earned the premium (similar to a comission as you enter a trade) and the option buyer has lost. If the option is in-the-money, the option writer has to pay out the option buyer the specified amount. There are:

Knock-In Options - the option is worthless until the underlying asset hits the specified barrier price in the set time period. Example: EUR/USD spot price is 1.28 and I buy a 1.30 knock-in option. The option is worthless until it breaks above the 1.30 level.

Knock-Out Options - the option becomes worthless if the specified barrier level is hit. Example: GBP/USD spot price is 1.51. I think the pair is heading higher, but do not expect much volatility. If I buy a G/U option with a barrier at 1.53 and it does not reach the price level in the specified time period, I get paid. However, if price breaks above 1.53, the option will become worthless.

Double No-Touch Options -Just like the knock-out option, but it has two specified barrier levels. Example: DNT option for 1.26 / 1.34 in EUR/USD. If price stays within the set range during the stated time period, the option writer has to pay me the specified amount. However, if price breaches any of these two barrier levels, the option will become worthless.

Double One-Touch Option - Knock-in option with two set barrier levels. Example: GBP/USD 1.46 / 1.54. I will get paid on the option if it reaches either of the two set barrier levels during the specified time period. If it does not, it expires worthless.

Why does it matter?

Barrier options can trade in decent size, there are sometimes ones in the value range of 500 million up to 1.5 billion. Let's use an example for the Knock-Out barrier option, as it the more common used one.

Put yourself in the position of the option writer. You sold a 1.27 / 1.34 DNT barrier option to a customer with a 500 million $ payout. Price is approaching the 1.27 level and that is exactly what you want to see. Once it hits 1.27, you have pocketed the premium and will keep the half billion. This is why option desks will gun for these barriers and try to get them triggered. Similar to the FX spot dealer, you want establish a short position and increase downside momentum. As there are often stops located above/below barriers, this will help to attract the attention of Spot dealers and of predatory traders gunning for the stops.

On the other side, there is the option buyer that has great interest to keep price away from the 1.27 level. Not everyone can buy a option in that size ($500m), so you can be sure he's got some firepower too. He will try to buy ahead of the level and hope there will be also other bids in decent size. A good example is the 1.28 barrier option in EUR/USD that got triggered today. The option buyer was lucky yesterday, as there was decent demand from Asian Sovereign names and corporates that kept the pair above the barrier level. However, EUR-negative sentiment led to fresh selling this morning and the pair broke below 1.28.

When we talk about barrier options in decent size (at least, larger than $50M), they certainly can have an impact on markets. However, I don't want this to look like there is a battle whenever a barrier option appears. Just to mention one reason, there are participants that simply don't care about some barrier option, they are gonna execute their trade idea nevertheless.

Some things to keep in mind:
• The "battle" will be more intense if the expiry is near. If the 1.27 barrier option in EUR/USD expires in two days and we are approaching the level, there will be very likely some effort from the option writer to get price down there and from the option buyer to keep price above for these two days. On the other side, if the option expires in two months, but it seems very likely we will break below 1.27, defence from the option buyer will be minimal.
• Sentiment & Market Profile! If we get bad news from Europe, there will be a lot of selling coming in and nobody's gonna care about some barrier option. The option buyer will most likely also see that it is not worth defending the barrier - why additionally waste money?

How to use this?

Note reported barrier options (IFR, ForexLive, the Twitter feed I mentioned earlier) and establish a position to push into the barrier level. Preferably, go with sentiment. Example: There were 1.28, 1.2775 and 1.2750 barrier options reported and sell stops reported below them. One could not have a more beautiful OF trade: Establish a short position and gun for the barrier and stops below. Given the average daily range of EUR/USD, 1.2750 would've been a realistic target. But a good approach would also be to establish a position and take partial profits as each of the barrier gets triggered to your final target.

In general, it is more preferable to go with the option writer and attack the knock-out barrier, especially when sentiment favors such price action. However, in a market environment with little volatility and tight ranges, barrier protection can be stronger."

[Forexfux]

I just have started to read fti's "Technical Analysis Fallacy" thread and he summarized in an easy and very clear way why most traders lose.

He began with two stories his wise dad told him once:

"A Lesson about Human Nature.
The Turtle and the Scorpion.
------------------------------------ ------------------------

Once upon a time, LONG LONG ago in China
There was this scorpion, who wanted to cross a river.
Since he could not swim, he waited along the river banks for someone who could.
Along came a turtle, and the scorpion promptly asked if the turtle would give him a ride across.

The turtle quickly replied, NO, NO, NO.
Why? The scorpion asked.
The trutle replied, because you will sting me while I am carrying you across.
The scorpion replied, If I did that, then we would both drown
and What would I benefit from that? he asked.

Accepting the scorpions reasoning, the turtle agreed to give the scorpion a ride across.
While half way across the river, as the waters became choppy.
and the ride became rough, the scorpion stung the turtle.
And as the turtle was drowning, he asked the scorpion why he did it.
Now they will both drown.

The scorpion replied,
I am so very sorry, I couldn't help myself from doing it.
You see, ITS MY NATURE,

---END---"


"The Oldman Story.(Another River Story)

Once upon a time, long long ago in China. ( I made this up, not the story )
There was this old and pious man.

Unfortunately for him, the region he was staying got flooded babdly.
Just like his neigbours, the river was rising into his house.
So He made his way up onto the roof of his house.
The water kept rising until , the only thing visible on the ground was the roof of the houses.
Being the pious man he was, he started to pray.

Dear God, Our father in heaven,
Blessed be your name,
Give me this day my salvation,
Forgive me of my sins, I forgive all who sinned me.
Lead me not into temptations, Deliver me from evil,
esp this waters who's trying to swallow me.
For yours is the power , the glory and the kingdom.
Amen

Then he waited., sitting on his rooftop.
Along came a sampan, the people on the sampan urged for the old man,
to come onboard to be taken to safe grounds.
He replied, its alright, you people go along.
God will save me.
The people hearing that, left for higher grounds, confident that his God will save the old man.
The old man waited.
Then a dingy, came along, and the oldman waved the dingy along,
repeating what he had told the people in the sampan.
So along their way the dingy went.
Then much later, a helicopter came along to ferry the old man to safety.
The old man repeated his actions, and waved it along.
As the water rosed, the old man drowned.

When the old man reached heaven, he asked God.
God, why am I dead? Why didn't you answer my prayer?

God replied.
When I heard your prayer, I was so appalled that you were caught in such a horrible situation
that I sent those chaps in the sampan to go get you to safety. But you waved the away.
Seeing that, that didn't help you, I sent the guys in the dingy to see, if they could help you.
Similarly you waved them away.
I thought maybe if I sent the army, in the helicopter to rescue you, that it shouldn't fail.
But you didn't accept the grace anyway.
So that's why you are dead."

Then he asked: In one word, can you summarise the story in the context of trading?

And the answer:

the scorpian story

"The lesson my dad taught me was about the human self-destructive nature.
Thats why we smoke.
Thats why we drink.
Thats why we take drugs and medicine (poison)
Thats why we lov to lov chicks that are naughty.
and thats why most people get killed in markets.

He was not a Forex trader , he was a business man , but he knew the consiquences of the human nature.

You see mankind loves to destroy, its easier and their nature.
We destroy so that we can rebuilt.

Many traders harbours this self-destructive machanism, in their sub contious .
even lots of dealers. It's an urge, thingy, something that you cannot scratch.

The fact that most traders are successful in life, otherwise they wouldn't have the capital to trade, works against them. Because they would throough their suceesses have developed a kind of confidence about themselves. When this confidence is carried into positions in markets, it tend to work to their detriment , esp when the view is errorneous. But not unlike W Buffet, it can also work in their favour, the prerequisite is close to unlimited capitalisation."

the old man story

"The key word to the old man story.
the word is : "hope"
a word not so alien to traders.
Much traders have gone on the deep end because of the hope factor. See if rings a bell.
Read the story again.
Maybe you would see,the reasoning."

Great stuff from my point of view.

Btw: I don't smoke, I don't drink, I don't take drugs but I love naughty chicks